Introduction to Finance Final Exam
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and concepts that underpin the field of finance. The course covers essential topics such as time value of money, risk and return, financial markets and institutions, valuation of assets, and an overview of financial statements. Students will learn how individuals and organizations make financial decisions, the basics of investing and funding, and the role of financial management in business operations. Practical examples and real-world case studies are used to illustrate the application of financial concepts and to develop analytical and critical thinking skills needed for careers in finance and related fields.
Recommended Textbook
Financial Management Theory and Practice 3rd Canadian Edition by Eugene Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) What should be done to maximize shareholder wealth and thus the value of the firm?
A)Decrease the size of expected cash flow of the company.
B)Slow down the cash receipt of the organization.
C)Increase the risk level of the firm.
D)Raise the free cash flows of the business.
Answer: D
Q2) Fighting recession with low interest rates is technically impossible when a country has large trade deficits and huge national debt.
A)True
B)False
Answer: True
Q3) Which of the following best defines an income trust?
A)a fund that is set up for the purchase of debt for the company
B)a fund that is set up to receive the after-tax dividends of the corporation
C)a fund that is set up to receive the before-tax cash payments of the corporation
D)a fund that holds assets for the corporation
Answer: C
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Page 3
Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) An individual living in Alberta with wage earnings of $65,000 has invested $25,000 for 1 year in corporate bonds yielding 6%.What is the after-tax return? The relevant federal and provincial tax rates are 22% and 10%.
A)$480
B)$880
C)$1,020
D)$1,500
Answer: C
Q2) Aubey Aircraft recently announced that its net income increased sharply from the previous year,yet its net cash flow from operations declined.What could explain this performance?
A)The company's operating income declined.
B)The company's expenditures on fixed assets declined.
C)The company's cost of goods sold increased.
D)The company's depreciation and amortization expenses declined.
Answer: D
Q3) Income statements must be prepared only on an annual basis.
A)True
B)False
Answer: False
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Chapter 3: Analysis of Financial Statements
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Q1) Stewart Inc.'s latest EPS was $3.50,its book value per share was $22.75,it had 215,000 shares outstanding,and its debt ratio was 46%.How much debt was outstanding?
A)$3,572,356
B)$3,760,375
C)$3,958,289
D)$4,166,620
Answer: D
Q2) Refer to Scenario: Pettijohn Inc.What is the firm's book value per share?
A)$61.73
B)$64.98
C)$68.40
D)$72.00
Answer: D
Q3) Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.Trend analysis is one method of measuring changes in a firm's performance over time.
A)True
B)False
Answer: True
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Chapter 4: Time Value of Money
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Q1) What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%,compounded semiannually?
A)$1,819.33
B)$1,915.08
C)$2,015.87
D)$2,116.67
Q2) Last year Mason Corp's earnings per share were $2.50,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Mason's EPS to double?
A)5.86
B)6.52
C)7.24
D)8.04
Q3) You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?
A)Bank 1; 6.0% with monthly compounding
B)Bank 2; 6.0% with annual compounding
C)Bank 3; 6.0% with quarterly compounding
D)Bank 4; 6.0% with daily (365-day) compounding
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Page 6
Chapter 5: Financial Planning and Forecasting Financial Statements
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Q1) To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.
A)True
B)False
Q2) Which of the following statements is correct?
A)Because the process of planning involves long periods of time, only long-term considerations are involved.
B)Financial planning is built upon the assumption of the target capital structure being made.
C)If total assets increase by the same percentage as sales increase, then assets and sales will increase by same dollar amounts.
D)Financial planning models always include the three basic elements of firm value: cash flow size, risk, and timing.
Q3) Pro forma financial statements are used primarily to assess a firm's historical performance.
A)True B)False
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Chapter 6: Bonds, Bond Valuation, and Interest Rates
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Q1) If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?
A)1.90%
B)2.09%
C)2.30%
D)2.53%
Q2) There is an inverse relationship between bonds' quality ratings and their required rates of return.
A)True
B)False
Q3) Assume that all interest rates in the economy decline from 10% to 9%.Which bond would have the largest percentage increase in price?
A)a 1-year bond with a 15% coupon
B)a 3-year bond with a 10% coupon
C)an 8-year bond with a 9% coupon
D)a 10-year zero coupon bond
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Chapter 7: Risk, Return, and the Capital Asset Pricing Model
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Q1) By definition,which of the following is correct regarding the beta of the market?
A)The market beta will depend on the composition of the market portfolio and could be greater than or less than 1.
B)The market beta will be less than 1 as the market portfolio is generally more diversified than an individual's portfolio.
C)The market beta will be equal to 1 given that it is the portfolio containing all assets.
D)The market beta will be great than 1 as the market portfolio is generally more diversified than an individual's portfolio.B
Q2) An investment has an average return of 8.3%.The standard deviation of returns on this investment is 20.81%.Given this information,what is the range of return 99% of the time?
A)70.73% to -54.13%
B)70.73% to 8.3%
C)70.73% to 54.13%
D)8.3% to 54.13%
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9
Chapter 8: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Q1) Stocks X and Y sell at the same price.Stock X has a required return of 12% while Stock Y's required return is 10%.Stock X's dividend is expected to grow at a constant rate of 6% a year,while Stock Y's dividend is expected to grow at a constant rate of 4%.If the market is in equilibrium so that expected returns equal required returns,which of the following statements is correct?
A)Stock X has a higher dividend yield than Stock Y.
B)Stock Y has a higher dividend yield than Stock X.
C)One year from now, Stock X's price is expected to be higher than Stock Y's price.
D)Stock Y has a higher capital gains yield.
Q2) The Zumwalt Company is expected to pay a dividend of $2.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 5.00% per year in the future.The company's beta is 1.15,the market risk premium is 5.50%,and the risk-free rate is 4.00%.What is the company's current stock price?
A)$42.25
B)$43.31
C)$44.39
D)$45.50
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Page 10
Chapter 9: The Cost of Capital
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Q1) Mihov Inc.hired you as a consultant to help estimate its cost of capital.You have been provided with the following data.(1): r<sub>d</sub> = yield on the firm's bonds = 7.00%,and the risk premium over its own debt cost = 4.00%.(2) r<sub>RF</sub> = 5.00%,RP<sub>M</sub> = 6.00%,and b = 1.25.(3) D<sub>1</sub> = $1.20; P<sub>0</sub> = $35.00 and g = 8.00% (constant).You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates.What is that difference?
A)1.13%
B)1.50%
C)1.88%
D)2.34%
Q2) Vang Inc.estimates that its average-risk projects have a WACC of 10%,its below-average risk projects have a WACC of 8%,and its above-average risk projects have a WACC of 12%.Which project (A,B,C,or D) should the company accept?
A)Project B is of below-average risk and has a return of 8.5%.
B)Project C is of above-average risk and has a return of 11%.
C)Project A is of average risk and has a return of 9%.
D)Project A has a below-average risk and has a return of 7.5%.
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Page 11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Adler Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? \(\begin{array}{cccc}
\text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3 \\ \hline \text {Cash flows: } &-\$ 1,000 & \$ 450 & \$ 460 & \$ 470 \end{array}\)
A)$142.37
B)$149.49
C)$156.97
D)$164.82
Q2) Selecting the project that has the highest equivalent annual annuity seems to be the rule for comparing projects with different lives.This rule should apply to both independent and mutually exclusive projects.
A)True
B)False
Q3) Theoretically speaking,hard capital rationing does not exist.
A)True B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) A firm is considering a new project whose risk is greater than the risk of the firm's average project,based on all methods for assessing risk.In evaluating this project,what would it be reasonable for management to do?
A)increase the estimated IRR of the project to reflect its greater risk
B)reject the project, since its acceptance would increase the firm's risk
C)ignore the risk differential if the project would amount to only a small fraction of the firm's total assets
D)increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk
Q2) When determining the present value of the tax shield for assets being replaced rather than bought new,the calculation must reflect the cash flow difference (incremental cash flow) generated by the new and old assets.
A)True
B)False
Q3) If a firm's projects differ in risk,then different projects should be evaluated using risk-adjusted discount rates.
A)True
B)False
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Chapter 12: Capital Structure Decisions
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Q1) Which of the following statements is correct regarding interest tax shields?
A)The benefits of interest tax shields are captured only by debtholders.
B)The benefits of interest tax shields are captured only by equity investors.
C)The benefits of interest tax shields are captured only by CRA.
D)The benefits of interest tax shields are captured by both debt and equity investors.
Q2) Which of the following is correct regarding the relationship between a firm's capital structure and its free cash flows (FCF)?
A)A firm's capital structure does affect its calculated free cash flows, because FCF reflects only dividend payments.
B)A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.
C)A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only free cash flow to equity.
D)None of the above is correct.
Q3) The bankruptcy risk produces an ambiguous effect on agency costs.
A)True
B)False
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Chapter 13: Distributions to Shareholders: Dividends and Repurchases
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Q1) Ross Financial has suffered losses in recent years,and its stock currently sells for only $0.50 per share.Management wants to use a reverse split to get the price up to a more "reasonable" level,which it thinks is $25 per share.How many of the old shares must be given up for one new share to achieve the $25 price,assuming this transaction has no effect on total market value?
A)24.50
B)25.00
C)50.00
D)52.50
Q2) Trenton Publishing follows a strict residual dividend policy.All else being equal,which circumstance would be most likely to lead to an increase in the firm's dividend per share?
A)The firm's net income increases.
B)The company increases the percentage of equity in its target capital structure.
C)The number of profitable potential projects increases.
D)Earnings are unchanged, but the firm issues new shares of common stock.
Q3) Share repurchases result in a decrease in EPS.
A)True
B)False
Page 15
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Chapter 14: Initial Public Offerings Investment Banking and Financial Restructuring
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Q1) When a firm refunds a debt issue,the firm's stockholders gain and its bondholders lose.This points out the risk of a call provision to bondholders and explains why a noncallable bond will typically command a higher price than an otherwise similar callable bond.
A)True
B)False
Q2) One big advantage of going private through a leveraged buyout is the tax shields from the borrowing.
A)True
B)False
Q3) In order to secure investor interest,underwriters like to provide more information during the roadshow presentations than what has been given in the prospectus.
A)True
B)False
Q4) Which of the following stock indices measures Canadian stock market performance?
A)Dow Jones Industrial Average (DJIA)
B)S&P 500 Index
C)S&P/TSX 60 Index
D)NYSE Composite Index
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Chapter 15: Lease Financing
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Q1) What will heavy use of off-balance sheet lease financing tend to do?
A)make a company appear more risky than it actually is because its stated debt ratio will be increased
B)make a company appear less risky than it actually is because its stated debt ratio will appear lower
C)affect a company's cash flows but not its degree of risk
D)affect the lessee's cash flows but only due to tax effects
Q2) Under International Accounting Standards IAS 17,a capital lease exists if the lease term is equal to 50% or less of the estimated economic life of the property.
A)True
B)False
Q3) Refer to Scenario: ABC Leasing.What is the net cost of this machine for the lessor as a legal owner receiving all tax benefits?
A)$19,057
B)$29,318
C)$73,465
D)$100,000
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Chapter 16: Capital Market Financing: Hybrid and Other Securities
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Q1) Which statement regarding a collateralized debt obligation (CDO) is true?
A)A security has no default risk exposure.
B)A security is tax free.
C)A security involves a credit default swap.
D)A security represents a claim on the cash flows of a loan.
Q2) When warrants are exercised,what happens as a result?
A)The security associated with the warrant drops in value depending on the exercise price of the warrant.
B)Funds are transferred from the retained earnings account to the common shares account for the market value of the shares.
C)The number of common shares outstanding changes.
D)There is no new capital for the firm because the warrants are exchanged for the common shares.
Q3) Special purpose vehicles (SPVs) in asset securitization usually contain credit enhancements for their securities.
A)True
B)False
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Page 18
Chapter 17: Working Capital Management and Short-Term Financing
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Q1) A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions,including the borrower's maintaining its financial strength.
A)True
B)False
Q2) Which of the following statements is NOT true?
A)Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
B)Accruals are free in the sense that no explicit interest is paid on these funds.
C)A conservative approach to working capital will result in all permanent assets being financed with long-term capital.
D)The risk to the firm of borrowing with short-term credit is usually greater than with long-term debt. Added risk can stem from the greater variability of interest costs on short-term debt.
Q3) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
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Chapter 18: Current Asset Management
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Q1) Although firms do not segregate funds for various motives of holding cash,they do consider them in setting their overall cash positions.
A)True
B)False
Q2) A firm on average collects cheques totalling $250,000 per day.It takes the firm approximately 4 days to convert the cheques into usable cash.Assume (1) a lockbox system could be employed that would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs only $25,000 annually.
A)True
B)False
Q3) What are the incremental pre-tax profits from this proposal?
A)$181,250
B)$206,500
C)$231,250
D)$256,250
Q4) Depreciation and obsolescence are inventory carrying costs.
A)True
B)False
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Chapter 19: Financial Options and Applications in Corporate Finance
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Q1) Which of the following best describes an option contract in principle?
A)An option is a contract that gives its holder the obligation to buy or sell an asset at a predetermined price within a specified period of time.
B)An option is a contract that gives its seller the right to buy or sell an asset at a predetermined price within a specified period of time.
C)An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.
D)An option is a contract that gives its writer the right to buy or sell an asset at a predetermined price within a specified period of time.
Q2) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy,this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.
A)True
B)False
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Chapter 20: Enterprise Risk Management
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Q1) Which of the following best describes counterparty risk?
A)the risk that one party defaults on its counterparty risk
B)the risk that one party defaults on its bond coupon payments
C)the risk that one party defaults on its derivatives contract obligations
D)there is no such thing as counterparty risk in derivatives markets
Q2) An option is a definite agreement leading to a firm completion of the transaction.
A)True
B)False
Q3) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A)Risk management can help a firm maintain its optimal capital budget.
B)Risk management can reduce the expected costs of financial distress.
C)Risk management can help firms minimize taxes.
D)Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
Q4) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
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Chapter 21: International Financial Management
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Q1) In 1997,a certain Japanese imported automobile sold for 1,476,000 yen,or $8,200.If the car still sold for the same amount of yen today but the current exchange rate is 110 yen per dollar,what would the car be selling for today in Canadian dollars?
A)$8,200
B)$10,250
C)$12,628
D)$13,418
Q2) A product sells for $7,500 in Canada.The exchange rate is $1USD:$1.33CAD.If the law of one price holds,what is the price of the product in United States?
A)$5,639 USD
B)$9,975 USD
C)$6,750 USD
D)$7,162 USD
Q3) When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
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Chapter 22: Corporate Valuation and Governance
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Q1) Manitoba Skate Co.'s free cash flow in the previous year was $1,250,000,and FCF is expected to grow at a constant rate of 2%.If the company's weighted average cost of capital is 17%,what is the value of its operations?
A)$8,000,000
B)$8,333,333
C)$8,500,000
D)$12,000,000
Q2) Which of the following best describes the condition under which an agency relationship arises?
A)when a principal contracts employees to work overtime.
B)when a principal negotiates a new wage contract with a union.
C)when a principal delegates decision-making authority to another party on behalf of the firm
D)when shareholders vote to decline a dividend payment.
Q3) The CEO of BMI Industries has been granted some stock options that have provisions similar to most other executive stock options.If BMI's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
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Page 24
Chapter 23: Mergers,Acquisitions,and Restructuring
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Q1) Firms A and B,both all-equity financed,are merging.Prior to merge,Firm A,having 100 shares outstanding,is worth $15,000,while Firm B has 50 shares outstanding worth $10,000.The combined firm will be worth $30,000.Firm A pays $11,500 in cash for Firm B.What is the net benefit of the merger to Firm A?
A)$3,500
B)$5,000
C)$11,500
D)$18,500
Q2) Currently,mergers in Canada can be accounted for using either the purchase method or the pooling method.
A)True
B)False
Q3) Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.
A)True B)False
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Chapter 24: Decision Trees,real Options and Other Capital Budgeting Techniques
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Q1) Which circumstance will NOT increase the value of a real option?
A)lengthening the time in which a real option must be exercised
B)an increase in the volatility of the underlying source of risk
C)an increase in the risk-free rate
D)an increase in the cost of obtaining the real option
Q2) A project has an expected NPV of -$250,based on the traditional DCF analysis.However,the real option valuation shows that the expected NPV is $750.What is the value of the option?
A)$250
B)$500
C)$750
D)$1,000
Q3) Real options are most valuable when the underlying source of risk is very low. A)True
B)False
Q4) Real options affect the size,but not the risk,of a project's expected cash flows. A)True
B)False
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